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Expense Ratio

The expense ratio is the annual fee that all funds or exchange-traded funds charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund's average net assets, is accrued on a daily basis.

If the fund's assets are small, its expense ratio can be quite high because the fund must meet its expenses from a restricted asset base. Conversely, as the net assets of the fund grow, the expense percentage should ideally diminish as expenses are spread across the wider base. Funds may also opt to waive all or a portion of the expenses that make up their overall expense ratio.

Annual Gross Expense Ratio
This is the percentage of fund assets paid for interest expense, operating expenses, and management fees. The gross expense ratio typically includes the following types of fees: interest and dividends on borrowed securities, accounting, administrator, advisor, audit, board of directors, custodial, distribution (12b-1), legal, organizational, professional, registration, shareholder reporting, subadvisor, and transfer agency. The gross expense ratio does not reflect the fund’s brokerage costs or any investor sales charges and is collected before fees waived/recovered/expense reimbursement, or recoupment by advisor. 

Annual Net Expense Ratio
The net expense ratio includes equivalent fees to the gross expense ratio, but in contrast to the gross expense ratio, the net expense ratio is collected after fees waived/recovered/expense reimbursement, or recoupment by advisor. The net expense ratio does not reflect the fund’s brokerage costs or any investor sales charges.

Morningstar pulls the annual report expense ratios, often referred to as the Audited Expense Ratios, from the fund’s audited annual report. Annual report expense ratios reflect the actual fees charged during a particular fiscal year, while prospectus expense ratios reflect ongoing estimates to the expense structure for the current period. 

Prospectus Gross Expense Ratio
This is the ongoing estimated percentage of fund assets paid for operating expenses and management fees. The gross expense ratio typically includes the following types of fees: accounting, administrator, advisor, auditor, board of directors, custodial, distribution (12b-1), legal, organizational, professional, registration, shareholder reporting, subadvisor, and transfer agency. The gross expense ratio does not reflect the fund’s brokerage costs or any investor sales charges and is collected from the Total Annual Fund Operating Expenses from the fund’s most recent prospectus fee table. 

Prospectus Net Expense Ratio
The net expense ratio includes equivalent fees to the gross expense ratio, but in contrast to the gross expense ratio, the net expense ratio is collected from the Total Annual Operating Expenses after Waiver and/or ExpenseReimbursement from the fund’s most recent prospectus fee table. The net expense ratio does not reflect the fund’s brokerage costs or any investor sales charges.

Finra Notice to Members 06-48  (“Material Fund Performance Sales Material”) explains that funds are required to disclose a fund’s total annual operating expense ratio, gross of any fee waivers or expense reimbursements. In addition, funds are able to present a subsidized expense ratio, as long as it is presented in “a fair and balanced manner.” If a subsidized expense ratio is provided, the fund should also present whether the fee waivers or expense reimbursements were voluntary or mandated by contract, along with the time period during which the fee waiver or expense reimbursement obligation remains in effect. Morningstar obtains the gross expense ratio for funds from the fund’s audited annual report. 

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